The Mortgage affordability calculator gives you an estimated value of the property you can afford to purchase. To use the affordability calculator, start by entering your annual income, down payment amount, interest rate, and mortgage amortization length.
If you're not sure what interest rate your lender will use to assess your affordability, use the Bank of Canada qualifying rate of 4.94%. Lenders often use the Bank of Canada qualifying rate to determine the maximum mortgage amount they can extend to you.
Your mortgage affordability also depends on your projected housing costs, such as property taxes, heating costs, and condo fees.
Secured and unsecured debt obligations, such as credit cards and auto financing, are also taken into account. You should fill out all these fields to get an accurate estimate of your maximum mortgage affordability.
Mortgage affordability is determined by looking at your income and down payment relative to your expected housing costs and current debt obligations. It uses the Gross Debt Service Ratio (GDS) and Total Debt Service Ratio (TDS) to determine the maximum mortgage payment you can afford.
The affordability calculator assumes a scenario where you pass the mortgage stress test and finds the maximum mortgage payment you can afford. By default, the calculator uses 39% and 44% for GDS and TDS, respectively. You are, however, free to change the GDS and TDS thresholds in the calculator's settings.
Your income source can affect your mortgage affordability. Not all sources of income are treated the same, and it varies from lender to lender. Generally, mortgage lenders want stable sources of income.
For example, if your income is mostly commission-based or paid on a contract basis, then a mortgage lender may want to see a long history of reoccurring income, up to two years in some cases.
If you are in a situation where your source of income may not be treated as equally as a stable salary-based source of income, then it's best to talk to a mortgage broker. Mortgage brokers may have access to mortgage lenders that deal with applicants with non-traditional sources of income.
If you're self-employed, you may have to jump through a few extra hoops to get a mortgage. Most mortgage lenders are going to want to see up to two years of self-employed income history before they'll deem your source of income to be "stable" enough for them.
There are also mortgage lenders who specialize in providing mortgages to self-employed individuals. These lenders have a more straightforward and streamlined approach to providing mortgages to self-employed people. Speak to a mortgage broker or search online if you want to find these lenders.
The Gross Debt Service ratio indicates what proportion of your income goes towards expected housing-related costs. These costs include the anticipated property tax of the home you are looking to purchase, heating costs, condo fees, and mortgage payments.
The Total Debt Service ratio indicates what proportion of your income goes towards expected housing-related costs in addition to existing debt payments you must meet. Housing-related costs include everything from the Gross Debt Service Ratio calculation. Debt obligations will consist of credit card payments, car payments, lines of credit, and any other secured or unsecured forms of debt.
Minimum credit card payments vary from card to card. As a result, lenders will usually take 3% of your outstanding credit card balance and divide that by 12 months to estimate your monthly credit card payment. Most other forms of unsecured debt balances, such as unsecured lines of credit, are treated this way, as well.
The GDS and TDS ratio thresholds indicate the maximum proportion of your income that can go towards housing or debt expenses. The CMHC recommends a GDS ratio threshold of 35% and a TDS ratio threshold of 42%. In other words, no more than 35% of your income can go towards housing costs. And no more than 42% of your income can go towards housing costs and debt payments. In practice, however, most lenders will allow for higher GDS and TDS thresholds of up to 39% and 44%, respectively.
The minimum down payment required for a mortgage depends on the purchase price of your home. It is based on a tier system as follows:
For example, if the purchase price is $650,000. The minimum down payment would be $40,000 (5% on the first $500,000 plus 10% on the remaining $150,000).
Be prepared to pay closing costs associated with purchasing a home, including land transfer tax, appraisal fees, legal fees, and inspection fees, among others. Typically closing costs account for 1% to 4% of the purchase price. You should set aside this amount to pay for these expenses at the time of closing.
There are many ways you can increase your maximum purchase price on a home. A few of the most effective methods include: